Amsterdam School of Economics Research Institute (ASE-RI)Amsterdam Business School Research Institute (ABS-RI)

Abstract

Contract audits aimed at reducing information asymmetry and transaction costs are frequently used in imperfect markets such
as defense procurement. This contradicts predictions from standard economic theory. We conduct a laboratory experiment to
investigate this paradox. Our laboratory setup allows us to investigate the conditions under which individuals decide to initiate
a contract audit and to carefully assess its economic value. Our theoretical approach draws upon two distinct literatures.
The theory of planned behaviour explains why organizations may engage in contract auditing even when markets are imperfect.
Social preference theory explains why traders may adjust prices when a contract audit indicates that the original price yields
an inequitable distribution of the surplus. Our results indeed show that audits lead to an increased share of the surplus
for the buyer, but this increased welfare is completely offset by the audit costs. To further investigate motivations to initiate
contract audits, we measure our subjects' attitudes towards contract auditing and their level of perceived behavioral control;
and we manipulate subjective norms about having contract audits done. These treatments show that a positive attitude toward
contract auditing, enhanced perceived behavioral control, and pressure to perform a contract audit all lead to more contract
audits.

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